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Types of Pension Plans in India

Inderpal Ahluwalia 08 December 2017

Pensions plans also known as retirement plans are insurance investment products in which you can put money to accumulate over a period of time. On maturity, these plans help you to have a steady income flow which can be used for your retirement. Pension plans help you to have an organised income plan structure and helps increase your investment manifold which eventually help you in your final maturity disbursement amount.

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How does a Pension Plan Work?

Life insurance companies in India offer pension plans as bundled products. The plans offer double benefit of both insurance and investment. A usual pension plan normally has two phases.

Accumulation Phase

In this phase, you do the hard work and pay premiums throughout the tenure of the plan. The premiums collected are invested in securities by the insurance companies. This makes your fund grow and helps in accumulation of enough money which helps you to get a regular income during your retirement or on maturity of the policy.

Annuity Phase

Annuity phase is the fruitful phase when you start getting returns on your investment. This is a period when the policy holder starts getting the pension. The vesting age in most plans is during ages of 50 to 70 years of the policyholder. During this phase, you are also allowed to withdraw 33% of the accumulated fund in one go. The rest is used for buying an annuity plan which pays pension depending on the annuity option and mode that you have selected which can be monthly, quarterly, half yearly or yearly.

Types of Pension Plans

Pension Plans are mostly of two types as mentioned below:

  1. Personal Pension Plan

  2. Work-based Pension Plan

What is a Personal Pension Plan?

Pension policy that is taken personally through a life insurance company is called personal pension plan. Your premium contributions get invested in funds which you can choose according to your risk appetite and plans for future. Personal pension plans have no links to your employer and you choose your own plan on a defined contribution basis.

Let’s explore the types of Personal Pension Plan.

Personal Pension plans are of three types:

1- Deferred Annuity Plan

In this plan, the policyholder decides the annuity. Say if the policy holder buys a plan for a term of 30 years also known as deferment period then his annuity will begin only after 30 years. Deferred annuity premiums can be paid as a ‘single premium’ or as a ‘regular premium’ as per the choice of the policy holder.

2- Immediate Annuity Plan

In this plan the annuity commences immediately. The policy holder is required to pay lump sum and the annuity/pension starts immediately or within a period of 1 year of having paid the premium. The payment frequency for pension can be monthly, quarterly, half yearly or yearly.

3- Pension plan with /without life cover

Pension plans with inbuilt life insurance cover offer full sum assured in case the policy holder dies during the accumulation stage. Without life cover pension plans, pay out is only the corpus built till date to the nominees along with the interest as decided by the insurance company in an unfortunate case of death of the policyholder during the accumulation stage.

What is a Work-based Pension Plan?

A work based pension plan is set up by the employer to help their employees to save for their retirement. In this pension plan, both the current employer and employee contribute to the fund on monthly basis. The employee’s contribution is deducted from the salary directly.

Types of Work-based Pension Plan

There are three main types of work-based pension plans:

1- Defined Benefit

In case of a defined benefit plan, benefits are calculated based on factors like years of service left and their salary.

2- Defined Contribution or Money Purchase Plan

In this plan, benefits are calculated based on the contributions of the employee and the employer each month and also the performance of the investments made with that money.

3- Hybrid

It is a mixture of Defined Benefit and Defined Contribution pension plans.

Few Tips on Retirement Plan Investment:

Start Early: The longer your money stays invested the more benefit you can avail during retirement.

Systematic Investment: Invest a fixed amount by calculating how much income you would require post retirement.

Choosing the right plan: With so many retirement plans out there select the one that offers the benefits which will best suit your retirements.

Always remember, a systematic and good retirement plan will be a reward during your old age when you are no longer capable of earning an income.

Recommended Read: How to use Life Insurance for retirement planning